The answer to this question is 270,000 but I’m having problems with the calculations, please make sure the calculations are legible so I can understand. If a company produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was:
Direct material $625,000
Direct labor 375,000
Variable overhead 125,000
Fixed overhead 1,500,000
Total cost $2,625,000
At the start of the current year, the company received an order for 3,000 drives from a computer company in China. Management of has mixed feelings about the order. On the one hand they welcome the order because they currently have excess capacity. Also, this is the company’s first international order. On the other hand, the company in China is willing to pay only $135 per unit. What will be the effect on profit of accepting the order? Answer is 270,000
| Selling Price | 175.00 | ||
| Costs: | Total | PU | |
| Direct Material | 625000 | 25.00 | |
| Direct Labor | 375000 | 15.00 | |
| Variable OH | 125000 | 5.00 | |
| Fixed OH | 1500000 | ||
| TC | 2625000 | ||
| Relevant Costs for Special Order: | |||
| Costs: | PU | ||
| Direct Material | 25.00 | ||
| Direct Labor | 15.00 | ||
| Variable OH | 5.00 | ||
| Fixed OH | 0.00 | (Sunk Cost) | |
| TC | 45.00 | ||
| Special Price | 135.00 | ||
| Total Relevant Cost | 45.00 | ||
| A | Net Benefit PU | 90.00 | |
| B | Special Order Qty | 3000 | |
| A*B | Total Impact on Profits | 270000 | |
| Hope it clarify your doubts | |||
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